Manufacturing orders disappoint but output increases – CBI

New manufacturing orders fell slightly in the three months to April but output increased and firms are expecting orders to grow in the next quarter. That's according to the latest CBI quarterly Industrial Trends Survey.

The decrease in total new orders was driven by a fall in domestic demand this quarter, the fastest pace of decline since January 2012, whereas export orders stabilised.

However, manufacturers have increased their stocks of work in progress and finished goods. This was most likely in anticipation of a better coming quarter, with expectations for total orders growth at the strongest level for a year. Meanwhile output is also expected to rise and manufacturers' optimism has improved.

Employment in the sector increased in-line with expectations in the three months to April, and manufacturers expect to increase their headcount in the next quarter.

Contrary to expectations, domestic price inflation was unchanged on the quarter, but growth in average unit costs was the highest since January 2012, squeezing manufacturers' profit margins again.

However, weaker sterling meant that the number of businesses citing prices as a factor likely to limit export orders fell to the lowest level since April 2012. At the same time, concern about the effect of political and economic conditions abroad on exports rose to its highest for a year.

Stephen Gifford, CBI Director of Economics, said: "This quarter was a mixed bag for manufacturers, with new orders disappointing because of a decline in domestic demand, but output did increase. Firms are expecting to ramp up production in the coming quarter on the back of an expected rise in new orders. Although weaker sterling has eased concern about international competitiveness, manufacturers highlight the potentially chilling effect of political and economic instability abroad on export orders, such as the Cyprus crisis."

Key findings - three months to April

• 22% of firms reported an increase in total orders and 28% said they decreased, giving a balance of -6% - disappointing expectations of growth (+14%) in the previous survey, but nonetheless above the long-term average (-3%).
• The balance for domestic orders (-14%) was the lowest since January 2012 (-17%), while the balance for exports orders (-3%) was the highest since April 2012 (+4%).
• The proportion of firms reporting that they were working below capacity (59%) was at its highest since January 2011 (59%).
• However, 23% of firms reported an increase in output and 18% said it decreased, giving a balance of +5%.
• Manufacturers said they were slightly more optimistic about their business situation than in the previous quarter (+5%).
• Numbers employed in the manufacturing sector increased (+10%).

Next quarter

• A balance of +18% of manufacturers expect total orders to increase, with +19% expecting export orders to rise and +8% predicting growth in domestic orders.
• A balance of +23% of firms expect output to increase – the highest level since April 2012 (+24%).
• A balance of +8% of manufacturers expect to increase headcounts.

Prices, investment plans and constraints

• Average domestic prices were broadly flat (+2%), while average export prices decreased (-7%). Average unit costs for manufacturers increased significantly (+27%) – the highest balance since January 2011 (+27%).
• Concern about prices acting as a constraint to export orders in the next three months fell (to 40%), the lowest since April 2012 (39%), with sterling depreciating by 4.2% between the January and April survey periods.
• Concern about political and economic conditions abroad as a likely limit on exports was cited by 39% of firms, the highest since April 2012 (41%).
• Manufacturers expect to spend more over the next year on product and process innovation (+26%), training (+13%) and plant and machinery (+4%) but less on buildings (-22%) relative to the past twelve months – the latter is the lowest balance since July 2009 (-43%).
• The number of manufacturers citing labour shortages as a constraint to capital spending in the year ahead rose to its highest level recorded in the survey (16%, record since October 1979); the availability of internal finance as a limiting factor rose to its highest level (30%) since April 2010 (30%); and inability to raise external finance as a limiting factor rose to its highest level (12%) since October 2009 (14%)